News and Insight for Sales Leaders by Gerhard Gschwandtner

01/23/2012

Pricing Optimization in a B2B World: Value-Based Pricing Comes of Age for Sales

Today's blog post is by Steven Forth, CEO of LeveragePoint, the leading SaaS platform for value-based pricing and sales.

The economic climate is tough: financial uncertainty, wild fluctuations in commodity prices, global competition, and rapid commoditization of products that we all thought were safe. Business buyers are paying a lot more attention to the economic variables in a purchase decision, and this is putting new pressure on sales to execute with an emphasis on value-based selling. This is something with which most of us have little experience. We know how to build relationships, uncover customers' needs and pain points, and translate features and benefits into solutions. But most of us are not very familiar with translating those solutions into economic impacts. And yet, that is precisely what we need to do today to capture an unfair advantage in the market.

One approach is to estimate the return on investment (ROI) for the customer. Many buyers, especially financial buyers, insist that the sales team provides ROI calculations as part of their proposal. In fact, though, ROI is not a very useful tool for sales. It is an important approach for the chief financial officer (CFO), who often needs to make decisions between very different options – apples-to-oranges kinds of decisions.

But in sales, we are more often comparing apples to apples – the buyer is trying to decide between two similar solutions from competing vendors. Or, in some cases, it is apples versus going without ("I haven't been eating apples, so why should I start now?"). How does one make the economic sale in this case?

Over the past two decades, pricing experts have been developing an approach called value-based pricing, which depends on the creation and subsequent use of value models to set price ranges for different segments and hone value message. (There are many articles on this available on the Resources section of the LeveragePoint Website.) Value-based pricing is based on a few key principles:

The customer always has an alternative (known as the Next Best Competitive Alternative), and the price of this alternative sets the market price.

Your solution will have some positive economic impact for the customer that your competitor’s does not. By working with the customer, the scope of these can be estimated.

Your solution will have some unique costs or shortcomings compared to the competitive alternative, and it is important to acknowledge these.

These three principles are combined to create a value model. A value model is a collection of value drivers for a specific customer or segment relative to a competitor. A value driver is a mathematical equation that shows how a customer derives value from your solution.

One common objection to value models is, "We can't get data for the value driver functions." Our experience is that, as long as the value driver makes sense and the initial numbers are reasonable, customers are willing to discuss them and share information in the sales conversation, especially if the salesperson understands value and acknowledges the competitor and the positive and negative value of his or her company's own solution.

Like sales, pricing is a conversation, and it needs to be collaborative. In the current economic environment, we need to be able to sell the economic value of our solutions as part of an honest conversation with our customers.